Inside the Market’s roundup of some of today’s key analyst actions
Alimentation Couche-Tard Inc. (ATD.B-T) is “next up on the ‘wild ride’ fall 2018 earnings season,” said Desjardins Securities analyst Keith Howlett, emphasizing the market is reacting “more dramatically than ever” to both earnings beats and misses.
Ahead of the release of its second-quarter 2019 results on Tuesday after market close, Mr. Howlett thinks investors should watch for both the company’s U.S. fuel margins and same-store sales growth, which he believes could cause a strong response from the Street.
“U.S. fuel margins are challenging to predict, as fuel margins vary by day and by region,” he said. “In addition, margins vary by business model (eg Costco low-margin, high-volume model) and with mix of fuel sold (premium/regular, gas/diesel/other). Tracking services provide directional assistance on overall margins in the U.S. and by individual state. The retail margins are based on the rack (terminal) to retail spreads by region. Over the last 13 quarters, our estimate of US fuel margins reflect an absolute (whether positive or negative) error of US$1.64 cents per U.S. gallon. However, the errors largely net out over time (subject to not being volume-weighted), as the average error is US$0.13 cents.”
He added: “Over the last 21 quarters, the average same-store sales growth in the U.S. has been 3.1 per cent. Over the last two years, however, same-store sales growth weakened markedly for Circle K and other industry participants. There were many potential explanations, but none seemed determinative. Relief arrived in 1Q FY19 when same-store sales growth reaccelerated. ... We assume 2.5 per cent is the threshold of ‘acceptable’ same-store sales growth (from the perspective of investors). The two quarters (3Q FY17 and 3Q FY18) to which investors strongly reacted negatively featured both a U.S. fuel margin miss and relatively weak same-store sales growth in the U.S.”
Following a "strong" first quarter, Mr. Howlett is projecting adjusted earnings per share of 83 US cents, a penny higher than the consensus on the Street. He said his same-store sales growth estimates of 4.2 per cent in the U.S., 6.6 per cent in Canada and 7.3 per cent in Europe continues the momentum shown in the previous quarters."
Noting there has been a "very strong" reaction to results in the previous three quarters, Mr. Howlett maintained a "buy" rating and $74 target. The average target on the Street is $79.04, according to Thomson Reuters Eikon data.
"There were two reports of adjusted EPS above consensus, resulting in one-day increases in the share price of 6.7 per cent and 4.5 per cent, and one miss to consensus, resulting in a decline in the share price of 6.5 per cent," he said. " Over the last 21 quarters, Couche-Tard has met or exceeded consensus 12 times, equalled consensus twice and missed consensus seven times. The share price has increased in the trading day after the results release in 16 of the past 21 quarters.
"Couche-Tard shares have been range-bound over the last two years, despite strong earnings growth and positive analysts’ views (including our own). There have been an array of investor anxieties (eg electric vehicles, RINs, fleet fuel efficiency standards, tobacco consumption), but the most persistent and vexing one was weak same-store sales growth by Circle K as well as across the convenience store channel in the US. Same-store sales accelerated sharply in the last quarter, partially due to unusually hot summer weather in the U.S., Canada and Europe."
Elsewhere, Canaccord Genuity's Derek Dley expects to see retail momentum, driven by CST locations, continuing. He kept a "buy" rating and $76 target.
Mr. Dley said: "We are forecasting merchandise same-store sales of 3.0 per cent in both the United States and Canada this quarter. In our view, the continued momentum at CST locations across North America is expected to support the strong results, while the company is also expected to benefit from its revamped private label offering. In Europe, we are forecasting a 4.0-per-cent improvement in same-store sales, driven by Couche-Tard’s Circle K rebranding initiative, as we believe more than 1,700 stores in Europe are now displaying the brand."
"In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth, which coupled with management’s track record, and opportunities abroad, will allow the company to capitalize on accretive growth opportunities."
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Russel Metals Inc.'s (RUS-T) “value-add push, RONA-based approach and recent deals have permanently lifted its earnings power,” said Raymond James analyst Frederic Bastien following recent post-earnings marketing meetings with the company’s chief executive officer John Reid and chief financial officer Marion Britton.
"Judging from the stock price, however, these management-led initiatives appear lost on the market," said Mr. Bastien. "We acknowledge there is reason to pause amid mounting macro concerns, but we believe the Street is giving this year’s inflationary titfor-tat protectionist measures too much credit for RUS’ record 2Q18–3Q18 results. Even with our expectations for lower steel prices next year, we still see the firm earning far more than it did last year (or averaged over the past ten) and easily cover its dividend."
Believing Russel's move to have customers handle non-core processing functions has reduced volatility and seeing its Energy Products segment showing "resilience," Mr. Bastien raised his fiscal 2018 earnings per share projection to $3.48 from $3.10.
He maintained a "strong buy" and $36 target for its stock. The average target is now $34.50.
“The stock is changing hands for 6.9 times our EBITDA estimate for next year,” he said. “This implies a 1.8 multiple point discount to its 10-year average forward multiple of 8.7 times and represents a level not seen since 2011. Russel also trades at a discount to its U.S. service center comps whereas it has spent much of the past five years at a premium given its strong operating metrics, dominant market position and industry-leading dividend yield. Since we don’t expect investors to boycott Canadian stocks forever, we see RUS’ risk-reward profile as particularly attractive.”
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Citi analyst Andrew Baum lowered his rating for Eli Lilly and Company (LLY-N) to “neutral” from “buy,” feeling its valuation now reflects its growth outlook.
"After 40-per-cent outperformance versus the sector over the last 10 months, the stock is now trading close to our revised NPV [net present value]," said Mr. Baum. "Consensus EPS forecasts have risen to our previously above consensus estimates. Forecasts for in-market drugs (Trulicity for diabetes), pipeline (tanezumab for pain), portfolio restructuring (Elanco) and OPEX tightening are now increasingly priced into the valuation. Importantly our forecasts now include peak risk-adjusted sales of $3-billion for tirzepatide (GIP/GLP-1 agonist for diabetes). We prefer Buy-rated MRK in the US; AZN, Novartis, Sanofi and Merck KGaA in EU."
"Despite $7-billion Trulicity/ tirzepatide combined forecasts in 2025, and 2-8-per-cent above consensus earnings forecasts beyond 2019, we struggle to find material near term valuation upside on a risk adjusted basis. For tanezumab we anticipate a tempered launch given likely REMS programs and still unresolved safety issues. On the portfolio, we struggle to see material upside to Taltz and mirikizumab (both psoriasis) forecasts given ECLIPSE (ECLIPSED. JNJ’s Tremfya Likely Superior to NVS’s Cosentyx in Psoriasis. dated 05 Sep 2018) and future competition from AbbVie’s risankizumab and BMY’s TYK 2 inhibitor BMS-986165."
Mr. Baum raised his target price for Eli Lilly shares to US$115 from US$96. The average on the Street is US$113.06.
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Intuit Inc. (INTU-Q) is a “relatively defensive play in software,” said RBC Dominion Securities analyst Ross MacMillan, calling its solutions business “mission criticial” and its consumer tax segment “very recession resilient.”
Seeing its current valuation as "attractive," he raised his rating for the California-based business and financial software company to "outperform" from "sector perform."
"Our most recent survey of tax filers suggests: i) DIY should gain share from assisted at an accelerated rate due to tax reform; and ii) A higher
percentage of DIY filers will use hybrid-assisted (i.e. TurboTax Live) with positive implications for ARPU [average revenue per user]," the analyst said. "We also view management’s recent comments on TurboTax live price points as bullish. We reiterate our initial bullish view on consumer tax for FY19. We have nudged up our consumer tax expectations modestly and still see upward bias to estimates."
"We remain optimistic in the SMB segment's ability to drive double-digit growth. We believe improving ARPU trends are a key opportunity, driven by higher attach of online services as well as new higher ARPU offerings (such as QuickBooks Online Advanced). We also believe improving ARPU is positive for operating margins in this segment."
Mr. MacMillan increased his target for Intuit shares to US$242 from US$234. The average is now US$226.33.
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Tariffs may provided Descartes Systems Group Inc. (DSGX-Q, DSG-T) with a near-term tailwind, according to RBC Dominion Securities analyst Paul Treiber, who thinks freight volumes will rise as shippers pull forward delivery ahead of a Jan. 1 rise in tariffs.
Descartes, a Waterloo, Ont.-based provider of federated network and global logistics technology solutions, is scheduled to report third-quarter 2019 results on Nov. 28.
“Our estimates call for constant currency organic growth to reach 6.0 per cent Q3, up from 4.8 per cent Q2 and the highest level since Q3/FY12,” said Mr. Treiber. “Monthly U.S. truck freight rose 6.3 per cent month-over-month (up 9.5 per cent year-over-year) in October, as shippers take delivery of goods ahead of the increase in tariffs on Chinese goods from 10 per cent to 25 per cent scheduled for January 1. Additionally, continued uncertainty in regards to tariffs, Brexit, new sanctions (i.e. Iran) may increase demand for Descartes’ trade content solutions. U.S. eCommerce data remains robust (up 14.5 per cent year-over-year), which helps Descartes’ eCommerce focused businesses (ShipRush, pixi, Oz).”
“The pull forward of demand due to tariffs may also help Descartes’ Q4 (Jan-quarter). We expect Q4 organic growth to remain similar to Q3 at multi-year highs. As a result, we believe that Descartes may provide Q4 baseline for $66.4-million revenue and $19.6-million adjusted EBITDA, which would imply Q4 actuals near the Street ($71.4-million revenue, $24.5-million adjusted EBITDA).”
Mr. Treiber maintained an “outperform” rating for Descartes stock and US$36 target, which sits below the average of US$38.14.
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Laurentian Bank Securities analyst Chris Martino resumed coverage of Morneau Shepell Inc. (MSI-T) with a “hold” rating and target of $28.50. The average target is $30.10.
“We like the company’s highly recurring revenue base, predictable profitability and longer-term growth opportunities,” he said. “While we view the LifeWorks transaction favourably and believe some enthusiasm is certainly warranted, we take a cautious approach to valuation given LifeWorks’ SaaS revenue represents less than 1 per cent of proforma sales. In light of industry multiples, integration risk and limited operating leverage potential, we value MSI at 12.5 times 2020 estimated EV/EBITDA, consistent with peers and at a modest premium to historical multiples to reflect the company’s increased scale, technology platform and reversion to industry growth on increasing U.S. penetration.”
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In other analyst actions:
B. Riley FBR analyst Eric Wold downgraded DHX Media Ltd. (DHX-T) to “neutral” from “buy.”
David Leeder